Commentary, information, and intelligent discourse about the Irish economy

Political asymmetries and EMU

In a must-read article, Chris Pissarides states that “far from the currency bloc acting as a partnership of equals, it is a disjointed group of countries where the national interests of the big nations stand higher than the interests of the whole.”

This sums up perfectly where the European project is today. Indeed, there isn’t even solidarity among the smaller countries, as Malta and Luxembourg seek to distance themselves from Cyprus, reminding us of many similar protestations by individual PIIGS in the past, Ireland included. Not that it did any of them any good.

Was it not bizarre to see so many anti-German posters in Nicosia last week, when by all accounts it was the Cypriot President (among others) who wanted to see small depositors hit? Actually, no, it wasn’t. We have seen several statements by German politicians saying that the Cypriot business model is dead, and I’m sorry, but irrespective of the rights and wrongs of the issue this is simply unacceptable. The IMF has the right, and duty, to opine on such matters. So does the ECB, which is supposed to care about financial stability, whatever about how it behaves in practice. Perhaps one could find a rationale for the Commission, or maybe even the Eurogroup, to express an opinion on matters such as this. But an individual member state? Formally speaking, and in any club such formalities matter, it’s none of their business. Even if it is an election year.

The EU is supposed to work according to a set of well-understood principles. If we want to re-regulate the banking sector, and we should, then the recent decision to cap bankers’ bonuses is an example of how the system is supposed to work (again, irrespective of the merits of the issue). There are proposals, there is a vote, there is a decision. Fine. I’ll have more of that please.

But that is not what we are seeing here.

It might be less difficult to swallow if the German government were caped crusaders seeking to bring the entire European financial system to heel. But we all know who has been undermining the drive to have a meaningful European system of banking supervision, and it isn’t Cyprus. And is Mr Schaüble really going to try to prevent German banks from touting for business in that island, as the FT recently reported? I don’t think so. None of this means that Merkel and Schaüble are any worse than anyone else’s politicians, but if you are the arbiter of other countries’ fates, and you aren’t any better either, then there’s going to be a backlash. Which is terrible news for Germany in the long run.

My quote of the week is from another must-read article, this time by Wolfgang Münchau, who says that

I have believed for some time that it is impossible for Germany, Finland and the Netherlands to be in a monetary union with Cyprus, Greece and Portugal. Either the two sides agree to adjust more symmetrically, politically and economically, or this experiment should end.

The argument about economically asymmetric adjustment has at this stage been done to death, and almost everyone understands it, although the German government remains resolutely, proudly, and vocally, macroeconomically illiterate. Another reason why anti-German posters at mass demonstrations are something that we will have to get used to, which is tragic. But Wolfgang’s point about politically asymmetric adjustment is just as important, and gets to the heart of the matter.

When the EU club works according to its rules, people accept the outcomes, but in crises policies are made on the hoof, and it is the powerful who call the shots. This is inevitable, but it is also very dangerous, especially since the decisions that are made at times like this have a much bigger impact on peoples’ lives than anything that typically comes out of Brussels. We have been in crisis mode for much too long now, the crisis shows no signs of going away any time soon, and the political asymmetry is becoming intolerable.

A meaningful banking union, that had the power to stick its nose into the German banking system, and had a set of ex ante mutually agreed principles regarding how to resolve banks in all member states, would help reduce political asymmetries. More expansionary monetary and fiscal policies would help make economic adjustment more symmetric. I suspect we’re going to get neither, in which case we need to end the EMU experiment before it drags the broader European project down with it.

“far from the currency bloc acting as a partnership of equals, it is a disjointed group of countries where the national interests of the big nations stand higher than the interests of the whole.”

Without wishing to appear dismissive of the views of Pissarides, it is really remarkable that he should find this situation surprising as it has been true – on and off – of the EU as a whole from the very beginning. The treaties are enabling in character and they rely on the respect of the countries that signed up to them for the rule of law for their effectiveness, especially with regard to the respect of the rights of smaller nations. This varies as a function of the outcome of the deliberations of the various institutions. The problem with the Eurogroup is that it is something of an appendage to the treaties, being established under the terms of a protocol and required – on UK insistence – to meet informally.

Nation states – like leopards – do not change their spots.

The fact that the larger countries seldom agree with one another is a balancing factor. The mistake made by the Cypriot leaders – on the evidence – was to imagine that they could successfully introduce an outside player – Russia – in a game which was clearly out of their league.

On the argument in relation making economic adjustment more symmetric, if there is evidence that a fiscal loosening in Germany would improve the economic prospects of the countries in difficulties, I have yet to see it advanced. What can be corrected is the asymmetry in the operation of the Single Market and in greater harmonisation of economic and social policies. There is some evidence of movement on this by Germany but not enough.

That Germany is in an electoral mode is indisputable. Unless forced to by economic and social developments between now and September, there will be continued footdragging cf. this WSJ article (HT Eurointelligence).

Looking at the bright side, if “we need to end the EMU experiment before it drags the broader European project down with it”, then the good news is that the EMU experiment seems to be going Beaker right before our eyes. Hugo Dixon describes the shambolic Cypriot capital controls, which look like a prelude to Cyprexit:

A balanced and well-argued short article by Pissarides. He should use his considerable influence, and world-wide prestige as an economist, to work toward pulling Cyprus out of the Euro. It would be a better future for them. Now or the next few weeks is the time to do it.

I have believed for some time that it is impossible for Germany, Finland and the Netherlands to be in a monetary union with Cyprus, Greece and Portugal. Either the two sides agree to adjust more symmetrically, politically and economically, or this experiment should end.
[emphases mine – CG]

“For some time”?
What on earth did he believe before that?
Long before the introduction of the Euro, everyone familiar with optimal currency theory was preaching much the same thing. Correctly but in vain.

“[T]his experiment should end.”
It should not have been begun in the first place. Now we have to unscramble the scrambled egg.

This reminds me of Schauble’s darkly comic assertion, while in the midst of undermining the entire European projection by using German political power to destroy the economy of a small country, that he would not be bullied and would protect the Euro (especially against its smaller members).

I cannot help but add that for a country with a government that is “resolutely, proudly, and vocally, macroeconomically illiterate”, Germany seems to be doing rather well. Or am I missing something?

Of course you are perfectly right — I hope my satire wasn’t misunderstood. I fully understand the German indignados.
As the old joke goes, the German economics works in practice only, but it get’s the THEORY wrong.
And so the country FAILS the macroeconomics litmus test.

Dividing the EU into the core and the periphery and dealing with economies by way of economic models, as if they had certain fixed orbital relationships with one another, like the planets, simply does not add up.

I cannot help but add that for a country with a government that is “resolutely, proudly, and vocally, macroeconomically illiterate”, Germany seems to be doing rather well. Or am I missing something?

This is a case of you avoiding things rather than missing them.

The US has won all its wars recently, so clearly we should all adopt US foreign policy. Though the outcomes of US policy were bad for everyone else and hundreds of thousands died.

China’s economy grew 12% in 2012, so clearly we should all adopt Chinese economic policy. Though Chinese demographics, labour standards and society are so different from ours as to make it impossible to do so.

Germany has suffered least from the wrongheaded European consensus on austerity, adjusting to the global financial crisis and tight monetary policy. Though of course Germany were instrumental in forging these policies to suit their domestic requirements.

When did the European conservative movement become so proudly boorish and so self congratulatory in their ignorance?

A balanced and well-argued short article by Pissarides …
‘Balanced’ as in:
Cyprus is the victim and Germany is the culprit.

Read this again:

“The way Cyprus has been treated by its eurozone partners shows that far from the currency bloc acting as a partnership of equals, it is a disjointed group of countries where the national interests of the big nations stand higher than the interests of the whole.”

the interests of the whole is a hoary old euphemism for the interests of whatever particular lobby (country, industry, trades union, etc) I am now defending and please just give us the money because otherwise we won’t stop bitching and turning on the waterworks ..

Sorry, but despite your efforts to sound all reasonable this is an even more sickening example of what I find an unbelievable Teutonophobia in these parts. And from our academic elite who are usually expected to be a counter to populist xenophobia. What did Germany ever do to us?

There was an excellent article by John Bruton in the IT the other day which countered this phobia so well, pointing out the many ways in which Germany is far from creaming it in this EZ experiment. Okay Bruton made Lowry a minister. We all make mistakes.

It has long been my view of the world that many people pretend to engage in rational debate while actually just translating what they hear into what they thought before the debate started, i.e. they are incapable of engaging properly or debating a point in a way that can lead both parties to a better understanding.

Can we take it from your comments that what you are projecting onto Germans is in fact your own take on matters, and that you are happily proud of your interpretation?

In the meantime, my city centry office appears is being repeatedly buzzed by some sort of aircraft. Is this the inevitable next stage in the economic crisis?

Thank you for this excellent piece. We cannot let what’s great about the european project be crushed by the ‘folly of the elites’ that is the single currency.

Either we should make the structural changes that are required to make the currency work (banking union, fiscal transfers etc) or we should end the whole project. Continuing on the current path will only lead to a destructive outcome.

But Atlas Shrugged is not merely a novel. It is also (or may I say: first of all) a cogent analysis of the evils that plague our society, a substantiated rejection of the ideology of our self-styled “intellectuals” and a pitiless unmasking of the insincerity of the policies adopted by governments and political parties. It is a devastating exposure of the “moral cannibals,” the “gigolos of science” and of the “academic prattle” of the makers of the “anti-industrial revolution.” You have the courage to tell the masses what no politician told them: you are inferior and all the improvements in your conditions which you simply take for granted you owe to the efforts of men who are better than you.

I’m sure you can find the same sort of thing in far more ancient writings.

I’m sure you can find the same sort of thing in far more ancient writings.

I know, I am imagining a period of public spirited right wing discourse that never existed.

On the same topic I have just started Corey Robin’s The Reactionary Mind and with the grace of reason and a copy of “Guns, Germs and Steel” I hope I will finally grasp the complex psychopathology of conservatism and then be able to help in the search for a way of deprogramming subjects before the condition becomes incurable.

Even if a cure to late stage right wing fact rejection proves impossible I think good work is being done in the field of inoculating public discourse against the illness by John Quiggan, Paul Krugman and others.

“We have seen several statements by German politicians saying that the Cypriot business model is dead, and I’m sorry, but irrespective of the rights and wrongs of the issue this is simply unacceptable.”

Would somebody mind linking to these please – I’d like to read them and see how unacceptable they were.

@Kevin O’R

“The argument about economically asymmetric adjustment has at this stage been done to death, and almost everyone understands it”

That phrase “almost everyone”, importantly, does not include extend to the ultimate arbiter – the many millions of people that make up the German electorate. It also doesn’t include the UK electorate, or that of other major EU countries.

There is an enormous gulf between the significant faction of the warring macro-economic geekeratti that agrees with you, and the rest of the world – who are by and large sufficiently underwhelmed by the selection of competing wisdom on offer to either not waste their time engaging, or just go with the views of the last slightly charismatic and apparently plausible pundit they listened to.

The current roadblock is this question (not least because the viewer picks up the intonation in the interviewer’s voice):

“So do you think we can solve our debt problem by taking on more debt?”

In the context of a time limited TV interview this is currently the equivalent of a knock-out punch. You might regard it as no more useful than a mindless jibe – a question that reveals the questioner is economically illiterate perhaps, but in the Punch and Judy world of political knockabout it is a winner every time and the Angie-Dave axis will hammer away at it non-stop. It is dumb – but it works, and that is what counts.

All three contributions O’Rourke/Munchau/Pissarides are well argued and spot on.

@Gregory O’Connor.
” It would be a better future for them. Now or the next few weeks is the time to do it.”
+1
They may have missed the best opportunity, last weekend or even this one, but they need to do it.

@DOCM/CG

“I cannot help but add that for a country with a government that is “resolutely, proudly, and vocally, macroeconomically illiterate”, Germany seems to be doing rather well. Or am I missing something?

Of course you are perfectly right — I hope my satire wasn’t misunderstood. I fully understand the German indignados.
As the old joke goes, the German economics works in practice only, but it get’s the THEORY wrong.
And so the country FAILS the macroeconomics litmus test.”

DOCM, you are missing something.

German economics are perfectly literate in the national senses. They are utterly illiterate in a macroeconomic European sense, and will bring down the EU. German economics work to the destruction of others.

PS. I have no problem with ordinary German people but they should be advised that their country’s policies since the outset of this crisis while perfectly rational and perfectly effective from a short-term German point of view have been entirely discriminatory against weaker and smaller nations.

‘Wir leben autos’ is unlikely to be a great selling slogan outside of Germany right now.

Grumpy
And because commentators and politicians are dumb people like KoR should ….? I missed that bit.

Google schäuble “cypriot business model” or “cypriot business model” dead
Google is your friend. And its not just our friends in the Rhein-Oder region. Some cheese eating surrender monkeys had rather sharp things to say. Google is your friend.

You write:Can we take it from your comments that what you are projecting onto Germans is in fact your own take on matters, and that you are happily proud of your interpretation?

Zhou, if you talk to Germans (as I occasionally do) or read the German press (as I do on a daily basis) you can hardly arrive at any other ‘interpretation’ than that most Germans believe that they have ‘done enough’ for Europe and are unwilling to pay more than they are paying now. And that they see sweet talk about moral obligations and ‘solidarity’ with the downtrodden periphery countries as nothing more than ideological claptrap and an excuse to extort even more from Europe’s cash cow.

I would be very happy if you could provide evidence that my construal of Germany’s standpoint is erroneous.

Actually, as far as I can see the only real point we differ on here is that you view the German standpoint as morally untenable, whereas I am open-minded as to the rights and wrongs of the case.

I am not particularly ‘proud’ of this interpetration, but if you can come up with a better one, fire away.

Well Cyprus is certainly the victim. …. A little more consideration for the Cypriot people would not have gone astray in the past week.

There has been ‘consideration’ galore, except that consideration won’t pay the rental. Cypriots are going through a nightmare etc. etc.

My hunch is that Cypriots will make things even worse for themselves by seeking a perpetrator-scapegoat (Germany) that is — rightly or wrongly — so convinced of its own innocence that the very accusation of guilt will foster growth in anti-EU sentiment and make Germany even LESS willing to transfer resources (AKA banking union, et al) than it is at present.

I do no think that I am (missing anything). I am highly critical of many aspects of German domestic economic policy and have repeatedly made the point that these are damaging to neighbouring countries. Indeed, I provided some links in recent days on the skewing of German domestic energy and labour policies e.g.

In short, many commentators are, in my opinion, tilting at the wrong (German) windmill. They should be supporting the voices in Germany calling for change and not making blanket condemnations based on the mistaken assumption that there is some common monolithic view in Germany on what needs to happen (except in relation to the point made by CG above that Germany will simply put up the money to cover for the inability of other countries in the EA, notably France, to reform; the answer is Nein).

Pursuing this line simply adds to a growing sensation of victimhood in Germany and, I imagine, undermines the efforts of those recognising that change is necessary.

The point about “Europe” retaining its energy competitiveness will be the one hammered by Germany. The fact that domestic consumers are expected to provide it for Germany – depressing overall consumption in the process – will get less attention.

The camels are outraged about the rule breaking by some other members but blind eyes are turned to what is unpalatable to deal with under their noses. Hypocrisy?

Internal market rules have been seriously undermined by the massive rise in tax avoidance that has coincided with the adoption of the Internet and countries such as Ireland, the Netherlands and Luxembourg have facilitated it knowing that it is difficult for countries that see their tax bases eroded to respond to the challenge because of the requirement of unanimity on taxes.

So Germany, the UK and France have teamed up with the OECD as part of a G20 initiative to come up with remedies. In effect they are bypassing the EU institutions that are unable to do anything about it.

The UK for example is Amazon’s biggest market in Europe but it became a distribution depot for a unit in Luxembourg to avoid paying taxes in the UK and so on.

This issue for some is akin to questioning the bubbletime policy when dissenters were accused of ‘talking down the country’ and an individual here used a version of it a few days ago.

Local traders have to pay taxes but the biggest of all pay little or none.

Kevin O’Rourke suggests that politicians in one member country should not be allowed to criticise policies of other members? Should there be debates in parliaments and votes on allocation of tax funds for bailouts?

It would be a foolish government that would try an impose a ban on such idiscourse in today’s news environment.

NYT today…
“Luxembourg’s foreign minister, Jean Asselborn, has sharply criticized Germany for what he said were Germany’s efforts to dictate a business model for another European country. His criticism was in response to comments from Berlin that Cyprus’s banking sector was no longer sustainable, and to Germany’s insistence that it be restructured as part of any agreement. Some analysts have said that being subjected to strong criticism goes along with having the strongest economy in Europe.

“Germany is experiencing the reality of power,” Frankfurter Allgemeine wrote in a commentary on Wednesday. “Because Germany’s economy is so strong and because the distance between it and its partners is growing, so is the jealousy.”

“This sums up perfectly where the European project is today. Indeed, there isn’t even solidarity among the smaller countries, as Malta and Luxembourg seek to distance themselves from Cyprus, reminding us of many similar protestations by individual PIIGS in the past, Ireland included. Not that it did any of them any good.”

The Capital Control thing came as a bit of a shocker to me, I thought the ECB was ready to supply unlimited liquidity as it has done in Ireland. But what is it about Karl that makes me think he wants the Euro project to go belly up and that he is relishing this latest twist? It is only .2% of the population and time is needed to work out the haircuts on the over 100K.

As to the Bahamian dollar thing, I am old enough (I told you that before), to remember (pre 1979) when English Note & Coin and Irish Note & Coin were equally acceptable at par throughout the island and yet on the mainland they turned up their noses at all this pictures of animals on the coin and your wan on the notes.

@Carolus
Thank for link. He is stating the obvious really. How can you have a typical bank run when you are not allowed to take out your money.
I think Karl is right that the controls will go on for a considerable time without unlimited ELA.
Of course unlimited ELA would lead to the ECB subsituting for the Russians and others and I cannot see the ECB going there.
Why it might go on for years…http://www.ekathimerini.com/4dcgi/_w_articles_wsite2_1_28/03/2013_490480

Watching RTE. Cyprus government spokesperson saying controls will last a week. Cyprus CB spokesperson suggests a month. Some investment dude suggests a few months. Karl is taking a tad of a chance in surmising that they are here to stay. One should never give hostages to fortune if you have a high profile reputation to maintain.

They may be small but they rattled the cage somewhat. As for the S&P 500… There is nowhere else to go. Bunds today 1.25% and US Treasuries at 1.85%…guaranteed money losers if you hold.
Could be called rational exuberance!

How can you have a typical bank run when you are not allowed to take out your money?

Well, there might be an untypical, slow-motion bank run:

Tortoise-style — and it might be just as toxic and asphyxiating as the rabbit version. Food for thought anyhow.

Extract from article in today’s Die Zeit

There are psychological factors that could be dangerous here. “Even the impending withdrawal of funds by foreign investors can create a panic among bank customers,” said economist Schröder. Everyone in Cyprus knows by now that the banks are shaky. Everyone also knows that the rich know that too and want to leave. The logical conclusion: Many small savers will try to withdraw their money in order to get out first. The result would be what economists call the herd mentality: They all run in the same direction to avoid coming too late.

Karl is taking a tad of a chance in surmising that they are here to stay. One should never give hostages to fortune if you have a high profile reputation to maintain.

Many an economist of world reknown has given countless ‘hostages to fortune’
without in the least damaging their ‘high profile repuation’, no matter how often they get it wrong. At least not amongst their own followers.

JUNCKER ATTACKS BERLIN IN THE SZ — A very harsh Jean-Claude Juncker accused Berlin, meanwhile, of bending EU interests to internal political motives: “Why does Germany allow itself the luxury of constantly doing internal politics on questions that have to do with Europe? Why does it treat the Eurozone like its subsidiary?, the chairman of the Eurogroup asked in an interview with Süddeutsche Zeitung.

On this

the German government remains resolutely, proudly, and vocally, macroeconomically illiterate.

It’s really the German electorate that are economically illiterate. The government creates simple stories, fairy-tale like, with black and white characters to explain things to the masses.

Reading the comments sections on various European blogs and newspapers over the last few days, I am struck by the amount of people that, four years in to the crisis, still think one or more the following

(a) Germany is giving money to other countries

The money has to be paid back, it’s not a grant

(b) Germany has little or no chance of being paid back

EU debt is senior to everything but IMF debt. In Ireland’s case there’s 90bn of other debt ahead of it in the queue that’s going to be hit first.

(c) The money could otherwise be used to improve hospitals, schools etc in Germany.

Taxpayer revenues are not being lent to anyone – the money is coming from the capital markets. The money borrowed by Germany to capitalize the ESM is not counted as “debt” and has no impact on government deficits or debt ceilings/ratios (other than its servicing cost). It is classified as an “investment” or financial transaction from an accounting point of view. There’s a taxpayer contingent liability, but it is costing Germany next to nothing given its borrowing costs. Due to its seniority the prospect of the liability ever being realized is very remote (though by means of its crisis handling Germany appears to be doing its best to try and bring that possibility a bit closer). Should that remote possibility ever seem to be coming closer, you will find that it is suddenly in the public interest and in the interests of European solidarity for the ESM to be granted a banking license.

(d) Germany is shouldering most of the burden.

On a per captia basis every country has the same contingent liability. Other countries have higher borrowing costs and so if anything it is costing them more per capita than Germany.

It is hard to come up with exact figures, it it is likely that Germany has made net gains from all the bailout vehicles and schemes. Its public and private borrowing costs have been driven down, and cash outflows are very small (ESM capitalization debt servicing, return of SMP profits to Greece etc). In the beginning it was making a nice profit on EFSF loans, though that margin has since been removed, and is making profits on SMP purchases other than for Greece.

These myths held by an economically illiterate electorate are promoting and enabling disastrous policy choices to be made.

At least Junker and Asselborn (“Germany is striving for hegemony which is wrong and un-European”) are calling it like it is. In contrast Irish officials and politicians will “welcome” any proposed scheme no matter how crazy and counter-productive it is.

On September 30, 1859, Abraham Lincoln included a similar story in an address before the Wisconsin State Agricultural Society in Milwaukee:
It is said an Eastern monarch once charged his wise men to invent him a sentence, to be ever in view, and which should be true and appropriate in all times and situations. They presented him the words: “And this, too, shall pass away.” How much it expresses! How chastening in the hour of pride! How consoling in the depths of affliction![4]

But the Guardian,Reuters etc also reported the foreign ministers statement…try months not days,weeks.
“Cypriot minister: Capital controls will last a month
Any lingering hopes that Cyprus’s capital controls would be lifted in a week have been snuffed out by the country’s foreign minister.
Ioannis Kasoulides told reporters in Nicosia that Cyprus expects to fully lift the regime on its banks in “about a month.”
Kasoulides added:
A number of restrictions will be lifted and gradually, probably over a period of about a month according to the estimates of the central bank, the restrictions will be fully lifted.
The decree finalised last night explained that the measures would initially last for a week – but many experts have predicted Cyprus will keep them for many months. Kasoulides may still be too optimistic.”

Below is the link to a podcast of a discussion at the London School of Economics on Monday last 25th March 2013 on the topic of ” What should economists and policymakers learn from the financial crisis”. by the four most influential people in the world.

The concern over capital controls is touching.
Cyrpus has just been hit witha bank raid of 5.8BN euros, 30% of GDP.
In Ireland the equivalent bank hoist would be ~50BN.
In Germany the equivalent bank hoist would be ~800BN.
Gone. Taken from bank accounts.

Karl Whelan in a good article writes:
” The likely collapse of the economy may trigger a sovereign default which would further hit the banks and further increase creditor losses.”

Krugman estimates a GDP fall of 20%.

Both Karl Whelan and Paul Krugman, imho, underestimate the collapse in the Cypriot economy that the measures will precipitate, by virtue of not taking into account the immediate cause of the collapse: ie The sequestration of bank deposits, many of which will have formed the very working capital of Cypriot commerce.

@DOCM
[Post at 2.36pm]
I do accept that you have commented on several occasion on the need to remove the barriers to trade / services in Germany and other EU countries.

However, given the scale of the disparities, it is difficult to see such changes as having any significant short or medium term effect.

The monetary playing field will have to be levelled. One cannot have the wealth of the poorer peripheries being endlessly withdrawn to core financial institutions and then tell those citizens or depositors remaining in the peripheries to subsidise their banks. All simply because those banks now have to pay higher interest rates. Even subsidise the banks to the point of losing their deposits and destroying their economies.

France, Italy and Spain are floundering. Either Merkel wakes up and acts as some of her illustrious predecessors would have acted in similar situations or the overall political situation in Europe will continue to deteriorate. Cyprus is but a sideshow.

The comments of the OECD, suitably simplified in the briefing points for journalists, may also be noted.

“Stronger monetary and financial support is needed to exit from recession in the euro area…

 The euro area remains vulnerable to negative tail risks because feedback loops between banking system fragility and government debt burdens have not been fully severed. It is essential that the credit transmission mechanism be repaired. Rapid progress must be made to implement a comprehensive system of common banking supervision with clear crisis resolution and support mechanisms, as part of a process of returning banks to good health. The recent Cypriot crisis, while an exceptional case, shows the importance of addressing banking crises directly and decisively, but also of putting in place the right institutions at the euro area level to maintain banking system stability.

 There is a strong case to ease monetary policy further, given weak demand and inflation well below the ECB’s objective. Policy rates are already very low, but some scope remains to reduce them further. More specific forward guidance could be given by the ECB. Further thought should be given to how to expand quantitative easing. The risk of undue inflationary pressure associated with monetary easing is small, as the transmission mechanism is impaired, especially in the periphery countries where banks face high funding costs. Aggregate euro area bank lending is still contracting.

 Existing commitments to structural budgetary consolidation should be met, while allowing automatic stabilisers to operate fully. This implies that nominal deficit targets are likely to be missed.”

At the root of the problem are the Fall elections in Germany. The German politicians probably started the Russian oligarchs using Cyprus to evade taxes bandwagon. They certainly got on the bandwagon and fed a fine line of BS to a prejudiced and gullible electorate. As the politicians beat the Cypriots with a sledgehammer the electorate experienced paroxysms of joy bordering on the orgiastic. So now we have Cyprus sacrificed on the altar of short term political expediency.

Comments above and on other threads wonder why there is a lack of cohesion within the PIIGS or the small threatened countries with a sizable banking sector. This is where a charismatic Irish politician could play a role (are there any) the likes of a JFK, Honey Fitz, Prendergast of Kansas City or Daly of Chicago. A leader of men as opposed to a kisser of derrieres. Are all our Brussels representatives seat warmers or could one of them be prodded into action. Come to think of it the late great Kerryman Daniel O’Connell could certainly get the job done.

The EZ is a sack of fighting cats, lacking cooperation, vision, planning, and dare one say unity and loyalty. It is a quasi marriage of convenience awaiting a number of serial decree nisi.

I’ve changed views on several things over the past few years. More than anything else, I have used my time to learn a little more about ‘both sides’ of the policy debate that is on-going in the large continent of north America right now. It’s a policy debate that has been going on now, at least, since the 1970s economic crises, and the responses that occurred at that time in the United States, and what flowed from that period.

As I said, I’ve listened now, to quite a bit on both sides of that great debate, and there are intelligent individuals speaking on both sides. The trouble isn’t lack of creativity, it isn’t lack of insight. The ideas, and the people with the right kinds of ideas are present, and they are present on both sides of the divide.

However, having said all of the above, I do know the following. It doesn’t really matter what happens in Europe. Europe’s problems are far more containable, far more manageable, far more workable – as bad and all, as they are.

The basic thing that is going on in the world in 2013, is that it is in the best interests of America, that the crisis in Europe continues in some shape or form, for as long as possible. It only buys more time for America, and draws attention away from the very real and looming problems that have afflicted that continent.

What we are going to see, at some stage though, is a switch over of focus away from Europe, and towards America. Instead of seeing images of anti-German posters, and people in small Mediterranean countries rising in protest, in north America it will play out slightly differently. It will be old northern towns such as Detroit, Chicago, Milwaukee, Cleveland and several more that will be facing the same futures as what we see in many places in Europe today.

This is really, the other shoe that is left to drop – as soon as something gets solved, or sorted in the European continent. There may be an assumption, that solving things in Europe, might give the global economy a breathing space, and prompt some kind of recovery. Solving Europe, is instrumental only in so far as it then enables the bond raiders to turn their attention back to that larger continent, and that is when things will really begin to get weird. BOH.

No. In the context of a flawed Euro architecture the ESM has to be viewed as a measure to mitigate some of the design flaws, when the inherent instability of that architecture comes to the surface, as it does on a regular basis. The cost/benefit analysis needs to be done in each case.

However that’s a tangential point to the one I was making and I note you appear to agree with my assessment of the German electorate’s economic literacy.

The choice according to two posters here is that Germany has an ‘economically illiterate electorate’ or a ‘prejudiced and gullible electorate’ – – talk about tarring a lot of people with the same brush!

Maybe but couldn’t those insults be used against any country or people we are prejudiced against?

Some people call for more democracy rather than be hectored by bureaucrats and so on. But you can bet that they really don’t mean democracy!

Last week one of the posters who says the Germans are ‘gullible’ declared: ‘Putin is a hard headed, clear eyed leader who has studied Von Clausewitz in detail’ and on Wednesday, it was the turn of Human Rights Watch and Transparency International to be among the NGOs harassed in Russia. Representatives of the two non-governmental organizations said that officials from the Russian prosecutor general’s office and from the tax police had arrived at their Moscow branches for an ‘unannounced audit.’ The tax police — charming folk by all accounts.

As I said earlier in the week, the ECB council has approved policies strongly opposed by the Bundesbank but on the political side, there is nothing said about France; no fulminating about its bond yields. It too even sold debt at a negative last year.

Maybe it’s that François Hollande was a hero for a time last year and his growth pact was eventually revealed to be just a political slogan. He now has taken a back seat in Europe to avoid brickbats.

After the second round of the National Assembly elections in June, he was offered a few EIB funded projects and that was that.

However, it would have been useful to have a detailed plan that he could have used to rally support from other countries. He had nothing.

It would be useful if economists spent more time on developing proposals for growth rather than on op-ed pieces with aspirations. There is lots of breast-beating going on but few hard facts to support what have in effect have become mantras.

Nobody is going to support a Marshall Plan for Italy when it can hardly govern itself but there are measures that could be put in place to help young people.

@ Bryan G/DOCM
‘It’s really the German electorate that are economically illiterate. The government creates simple stories, fairy-tale like, with black and white characters to explain things to the masses’

I wonder about the word ‘explain’. It’s critical to ‘frame’ or describe the problem in a way which leads ‘naturally’ and ‘inevitably’ to the conclusions one is seeking to implant, and thus to the real world outcome which one wants. It’s much like the trade of the barrister and includes the art of rhetoric. We are social animals, much more persuadable than we like to think. The Enlightenment has its limits, and rationality is only part of our nature.
As Bourdieu might say, the descriptive is also the performative.

Another of his aphorisms is that ‘the dominant retain their position by constantly changing their stance’. This leads to all sorts of real world contradictions, so the debate has to be structured is such a way as to ensure the ‘nonsensical aspect’ is concealed. This is traditionally achieved by limiting the scope of the debate, the number of ‘legitimate’ contributors, and shutting down alternative debates by force if necessary. The history of the west, and the current reality of China Russia etc is littered with examples of ‘necessary repression’.

A proper analysis of the sociocultural factors at work in the GFC is beyond me. It is clear, however, that very serious money, and serious political power is at stake in the European sphere. The economic arguments which are rehearsed in government or academic circles represent only the surface of a global struggle for security, and the energy resources which underpin it. Europe is likely to lose out heavily, especially if the current political divisions persist, as seems most likely.

As Bourdieu demonstrates in so many of his extensive writings, the state, for all its faults and sometimes oppressions, is the repository of many hard won rights. One of the things which brought down the old autocracies was the free press. Monopoly control of the MSM has weakened the free press, but the blogosphere thankfully thrives.

The market state, as described by Bobbit in Shield of Achilles, is today’s dominant political model, while the wave of financialisation and globalisation continues to tear up old orders. I guess it is Schumpeter’s creative destruction writ large, and no one has the script. The US’s adventures in Vietnam, Iraq and Afghanistan also show that our hegemon, and world policeman, is just another crippled nation state.

If the German voter is economically illiterate, he or she is no more economically illiterate than the Irish one. Given the generally high level of literacy in Europe, such a state of affairs cannot be considered accidental. Vested interests continue to control political parties the length and breadth of Europe, while the ‘approved spokespersons’ dress up naked power grabs in the language of ‘economic necessity’ and ‘the general good’. Our younger citizens are treated to mass unemployment while consumer products are waved under their noses at every turn. The punishment of Narcissus.

In this, as most issues, one cannot go too far wrong with the principle of cui bono, or ‘follow the money’. There are endemic conflicts of interest in the corridors of power. Cute hoors hopping back and forth between the heights of the public and private sectors, and lauded for their talents. Heads down in the professions, and hoping for better weather. We manifest blind faith in ‘the leadership’, when it’s blindingly obvious that they are committed only to their own circle. FFS. As the Dork says, we are being farmed.

No wonder the German voter, and the average German politician, is confused. US-backed neoliberalism has triumphed over their own ordoliberalism, and led them into a cul de sac. Some German (and not just German) economists took the shilling, or rather the dollar.

One thing is for sure. It was not ordoliberalism that gave us the financialisation of the economy, or the GFC.

‘Ordoliberalism seems more aware of the limits of the market mechanisms and competition and of the legitimacy of other ordering principles that may coexist in other areas of a society. Competition and market forces were thus not seen as a universal, absolute principle, but as one that had to be confined within a given economic order. According to Wilhelm Röpke, another major figure in ordoliberalism:

…[w]e must stress most emphatically that we have no intention to demand more
from competition than it can give. It is a means of establishing order and
exercising control in the narrow sphere of a market economy based on the division
of labor, but no principle on which a whole society can be built. From the
sociological and moral point of view it is even dangerous because it tends more to
dissolve than to unite.

If competition is not to have the effect of a social explosive and is at the same time not to degenerate, its premise will be a correspondingly sound political and moral framework. There should be a strong state, aloof from the hungry hordes of vested interests, a high standard of business ethics, and undegenerated community of people ready to co-operate with each other, who have a natural attachment to, and a firm place in society.
(Röpke 1950, 181; our translation; emphasis added)’http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2142529
Where does Europe’s strongest power stand on that question today ?

Thanks for the interesting paper. May I respond with another which underlines a general point viz. that every country has its own social, economic and cultural idiosyncrasies and Germany must be allowed the same scope to have them as any other.

As far as outsiders are concerned, I suggest that the debate should concentrate on those elements which require some level of harmonisation across the EU for the achievement of a balanced economic relationship in a “single market” where all but one of the major economies share a single currency.

Germany falls down on this score under numerous headings. An enormous current account balance does not come into existence, against the background of a mediocre overall level of growth, by accident. It is deliberately engineered by those sectors of German society
that benefit most from it.

Germany could do better with its service sector and in the past when it had conscription, it provided a choice of working in various support services which depressed earnings.

Child care services are also important in a country where the number of children (under 14) fell by 14% in a decade. It’s worse in Japan, the leader in ageing, where according to surveys, male managers prefer to see pregnant employees quit.

Some of the critics of the German current account surplus seem to imply, that everyone being poorer maybe a better outcome.

However, given that the trade surplus mainly reflects an unusual situation where its big companies and Mittelstand family-run smaller firms were in a position to respond to requirements of emerging economies as their engineering had a world class reputation and in so many sectors, they met needs.

Some people downplay manufacturing but it’s where most corporate innovation happens.

The German firms didn’t emulate Apple and outsource all production. Today Apple is the subject of official attacks in the Chinese media, which appears to be geared towards boosting its own producers.

One thing is for sure. It was not ordoliberalism that gave us the financialisation of the economy, or the GFC.

Twelve out of ten.

BTW it is a pleasure to post on a blog at least one of whose commenters has actually heard of the great Wilhelm Roepke.

Some years ago I purchased via Amazon a book by Roepke (Civitas Humana, 1948). It turned out to be a discard from Kent County Library and had been lent out once in its shelf lifetime — on 1 March 1986, according to the library date stamp.

There are best-sellers, and there are worst-sellers, although the worst-sellers are often the best.

Interestingly, Roepke was by no means a diehard anti-Keynesian. On page 207 of CH he writes (referring to the Great Depression in Germany):

“It was in these circumstances that it became evident […] that a fatal vicious cycle had arisen which ought to be broken at all costs by bold and energetic measures of business-cycle policy, so that together with the economic crisis the political situation could be controlled. We realized that we had to deal with an emergency with which it would no longer be possible to cope on the familiar orthodox lines of the accepted business-cycle policy and that an “active business-cycle policy” would have to be embarked upon.

…I can remember very well that evening when the basic idea of this business cycle policy became clear to us, but we all immediately agreed that it was dynamite which we were handling and that it ought not to be allowed to fall into the wrong hands.”

Well, let’s hope that this citation itself doesn’t ‘fall into the wrong hands’.

Gotta rush now …

P.S. Your comment on my stimulus/response posting last Sunday. What on earth was I smoking? Perhaps it was my doppelgaenger …

UBS have an ad campaign at the moment : “Wir werden nicht ruhen.” I think they meant it to mean “we will strive unceasingly” but it brought to mind this 1971quote from Victor Papaniak : “In an environment that is screwed up visually , physically and chemically the best and simplest thing that architects , industrial designers, planners etc would be to stop working entirely.”

This crisis is massive. It is the financial equivalent of the plague . German savers are as exposed as anyone . Money is not worth what we think it is.
Decisions are made under massive pressure . What relieves the stress this week may cause an even bigger blow up 6 months down the line . Very messy . One could almost say incoherent .

The Dutch built an incredibly complex flood defence system after the 1953 disaster . It is based on a series of gates and barriers that are ultimately designed to protect the most important regions and assets of the country. Amsterdam is at the core of the system.
The nightmare scenario is a storm surge on the north sea that forces the closure of all the sea gates combined with a flooding of the Rhine in Germany .
No system is perfect . But some are more dependable than others .
In the case of the euro the more important regions are already under stress. Financial solidity is intangible innit . I was reading le Figaro the other day . French unemployment is heading to 3 million. Le Figaro has no answers . It is interesting to recognise the Irish independent in a different language .